RAISING FUNDS BY REMORTGAGING

If you are looking to improve your property, making it a better place to live and adding value, remortgaging is an option available to you if you have sufficient equity in it.

A remortgage is sometimes known as refinancing and simply involves replacing your existing mortgage with a new one for a (usually) higher amount of borrowing.

If you use remortgage funds to improve your property — home or investment — you will probably add value to it; possibly replacing some or even all the equity you have taken out.

With sellers not being able to achieve their asking price in the current weak market, remortgaging is an option owners are looking at more and more.

Remortgaging can be an alternative to selling. For example, if the property is your home and you need to move because of a growing family, remortgaging and adding an extension for an extra bedroom is an alternative to selling — especially if selling is proving difficult.

This blog explains the nuts and bolts of remortgaging a property — a home or a buy to let investment.

1. How much can you borrow?

Remortgaging will be a realistic option if the equity in your property — the difference between its value and the mortgage on it — has increased since you bought.

The amount you will be able to borrow will depend on your financial circumstances as well as the loan to value (LTV) lending of your chosen lender.

Say you approach a lender willing to lend 3 times your salary and offering borrowing on a 75% LTV basis.

Say your salary is £40,000 and the value of your property is £150,000 with an existing mortgage of £60,000.

Based on 3 times your salary, and subject to affordability, you can borrow up to £120,000; however, with the 75% LTV limit, you will be allowed to borrow 75% of £150,000 or £112,500.

Once you pay off or redeem the existing mortgage of £60,000 you will be left with £52,500 (£112,500 — £60,000).

2. Advantages of remortgaging

Remortgaging is attractive to property owners for a number of reasons.

The main reason is that it is a relatively simple and inexpensive way to raise capital for any purpose which your lender will allow.

You can release equity without having to incur the expense and or inconvenience of moving.

If you are a homeowner, lenders love the idea of lending for home improvements — since the money loaned will go into the property, hopefully adding value and strengthening their security.

They may be less keen to lend for other purposes such as business, debt consolidation or investment; however, it is possible to raise funds for these and similar purposes.

If you are a buy to let landlord, you may want to remortgage in order to improve the property, hopefully increasing your rental income in the process.

You may also opt for a remortgage as a way to raise capital to fund deposits for new purchases.

It is important to be accurate as to your intended use of the remortgage funds; failure to do so could amount to a serious and actionable breach of your mortgage agreement.

A big advantage of remortgage funds is that they are not subject to capital gains tax or income tax.

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3. Lower mortgage costs

Reducing your monthly mortgage payments can be one of the biggest advantages of remortgaging. It is one of the main reasons why people remortgage.

If you can find a new mortgage at a lower rate of interest than your current loan, remortgaging can save you money.

4. More suitable mortgage product

Refinancing can also have the benefit of migrating you to a more suitable mortgage product.

You may be on an interest only mortgage but calculate that you will be better off on a repayment mortgage.

There are several mortgage types and it is best practice to seek independent mortgage advice to identify the products most suitable for you.

5. Drawbacks of remortgaging

The advantages of refinancing are many and significant, but there are a number of possible disadvantages including:

• Borrowing more money on a remortgage is increasing your debt and increasing your debt-related risks; if you are unable to keep to your (higher) mortgage payments your home or investment property could be repossessed
• You may only be able to remortgage on the basis of payment of a higher interest rate and larger mortgage payments, reducing your disposable income, increasing your debt vulnerability
• The fees and charges of a remortgage — such as valuation, legal and mortgage broker fees — could be expensive and could outweigh your savings as a result of lower interest payments
• If your new mortgage includes a tie-in, you may face penalties or charges if you redeem the mortgage within the tie-in period.

The crucial point about remortgaging is to make sure you can afford the higher monthly payments which arise as a result of borrowing more money.

You should know how to deal with mortgage debt.

You also need to thoroughly understand the importance of savings — the need to have money in reserve in case something untoward happens, such as you become ill or lose your job.

6. Conclusion

A remortgage can be a simple and effective way to raise funds from your property.

When it goes well, you can lower your monthly payments and access a chunk of your equity — a genuine win-win situation.

However, taking out part of your equity is the equivalent of increasing your debt.

It is crucial not to go overboard with remortgaging.

Sadly, many people end up losing their property because they borrow too much, over committing themselves financially. That is something you must avoid at all cost. Remortgaging is only advantageous when it is fully affordable.

What has been your experience of remortgaging? Please leave your comments below.

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Dalton Barrett
Rebel Property Coach

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